EXHIBIT 13.1
Management's Discussion and Analysis of Financial Condition and Results of
Operation
The following discussion provides an analysis of the information contained in
the consolidated financial statements and accompanying notes beginning on page
__ for the three fiscal years ended January 1, 2005, January 3, 2004, and
December 28, 2002, respectively.
Results of Operations -- 2004 Compared with 2003
Sales increased 47% to $500.2 million in 2004 from $339.4 million in 2003. The
increase in sales was primarily in the Americas and Asia, driven by increased
demand for electronic products in the Asia region, sales from the Heinrich
Industrie, AG ("Heinrich") acquisition through May 2004 through the end of the
year and a full year of the Teccor Electronics, Inc. ("Teccor") acquisition.
Electronic sales increased $119.1 million or 58% to $325.6 million in 2004
compared to $206.5 million in 2003. Excluding sales of Heinrich products,
electronic sales increased $92.8 million or 45% to $299.3 million in 2004
compared to $206.5 million in 2003, primarily due to increased demand in Asia
and a full year of the Teccor acquisition. Automotive sales increased $16.4
million or 17% to $114.7 million in 2004 compared to $98.3 million in 2003
largely due to sales from Heinrich in 2004. Automotive sales excluding Heinrich
increased $5.0 million or 5% to $103.3 million in 2004 compared to $98.3 million
in 2003. Electrical sales increased $25.3 million or 73% to $59.9 million in
2004 compared to $34.6 million in 2003 largely due to Heinrich sales in 2004.
Electrical sales, excluding Heinrich, increased $2.9 million or 8% to $37.5
million in 2004 compared to $34.6 million in 2003, primarily due to modest
improvements in commercial construction and industrial activity in the North
American market. International sales increased 59% to $302.2 million or 60% of
net sales in 2004 from $189.6 million or 56% of net sales in 2003. The increase
in international sales was primarily due to strong demand for electronic
products in Asia, the addition of Heinrich, a full year of Teccor and favorable
currency effects, which contributed four percentage points to the overall sales
growth.
Gross profit was $179.0 million or 35.8% of sales in 2004 compared to $104.4
million or 30.8% of sales in 2003. The gross profit margin increase resulted
from cost savings initiatives in manufacturing and purchasing, fixed expense
leverage due to increased plant throughput and the recognition of $3.2 million
of Ireland restructuring charges in 2003.
Selling, general and administrative expenses increased $31.2 million to $99.8
million in 2004 from $68.6 million in 2003, primarily due to the addition of
Heinrich, a full year of Teccor, increased costs related to complying with the
Sarbanes-Oxley Act and higher selling related costs due to the increase in
sales. As a percentage of sales, selling, general and administrative expenses
decreased to 19.9% in 2004 from 20.2% in 2003, primarily due to increased
expense leverage on the higher sales base. Research and development costs
increased $8.8 million to $17.5 million, representing 3.5% of sales in 2004 as
compared to 2.6% of sales in 2003 reflecting increased investment in new product
development. Impairment of investments reflects the recognition of a non
tax-deductible charge of $2.2 million to impair a portion of the Semitron
investment acquired in 2002. Total operating expenses, including intangible
amortization and impairment of investments, was 24.4% of sales in 2004, compared
to 23.1% of sales in 2003. Total operating expenses, including intangible
amortization but excluding impairment of investments, was 23.9% of sales in
2004, compared to 23.1% of sales in 2003.
Operating income in 2004 increased 118.5% to $57.0 million or 11.4% of sales
compared to $26.1 million or 7.7% of sales in the prior year. The improvements
in operating income and operating margin were primarily due to higher sales and
the associated operating leverage partially offset by the impairment of a
portion of the Semitron investment acquired in 2002.
Interest expense was $1.5 million in 2004 compared to $2.0 million in 2003 due
to a lower weighted average interest rate in 2004. Other expense, net,
consisting of interest income, royalties and foreign currency items was $0.1
million compared to other expense, net, of $0.1 million in the prior year.
Income before taxes and minority interest was $55.4 million in 2004 compared to
$24.0 million in 2003. Minority interest was $0.2 million in 2004 reflecting the
minority share ownership in Heinrich. Income tax expense was $19.2 million in
2004 compared to $8.6 million in the prior year. Net income in the current year
was $36.0 million, compared to $15.3 million in the prior year. The Company's
effective tax rate dropped from 36.0% in 2003 to 34.8% in 2004, reflecting the
reduction of reserves related to prior tax years and tax structuring related to
the Heinrich acquisition. Diluted earnings per share increased to $1.59 in 2004
compared to $0.70 in 2003. The increases in net income and earnings per share
reflect the higher 2004 sales, margins and a lower 2004 effective tax rate.
Results of Operations - 2003 Compared with 2002
Sales increased 20% to $339.4 million in 2003 from $283.3 million in 2002. The
increase in sales was primarily in the Americas and Asia, driven by increased
demand for electronic products in the Asia region and sales from the Teccor
acquisition. Electronic sales increased $55.6 million or 37% to $206.5 million
in 2003 compared to $150.9 million in 2002. Excluding sales of Teccor products,
electronic sales increased $14.6 million or 10% to $165.5 million in 2003
compared to $150.9 million in 2002, primarily due to increased demand in Asia.
Automotive sales were essentially flat compared to the prior year as pricing
pressure offset increased volume and strengthening of the Euro against the U.S.
Dollar. Electrical sales increased $0.4 million or 1% to $34.6 million in 2003
compared to $34.2 million in 2002, primarily due to modest improvements in
commercial construction and industrial activity in the North American market.
International sales increased 24.6% to $189.6 million or 55.9% of net sales in
2003 from $152.2 million or 53.7% of net sales in 2002. The increase in
international sales was primarily due to strong demand for electronic products
in Asia, the addition of Teccor and favorable currency effects.
Gross profit was $104.4 million or 30.8% of sales in 2003 compared to $88.6
million or 31.3% of sales in 2002. The gross profit margin decreased as a result
of the addition of Teccor sales at lower margins than Littelfuse's base business
and the recognition of $3.1 million of Ireland restructuring charges in 2003.
Selling, general and administrative expenses increased $5.0 million to $68.6
million in 2003, from $63.6 million in 2002, primarily due to the addition of
Teccor. As a percentage of sales, selling, general and administrative expenses
decreased to 20.2% in 2003 from 22.4% in 2002, primarily reflecting Teccor's
lower selling, general and administrative expense percentage than Littelfuse's
base business. Research and development costs increased $0.4 million to $8.7
million, representing 2.6% of sales in 2003 as compared to 2.9% of sales in
2002. Total operating expenses, including intangible amortization, was 23.1% of
sales in 2003, compared to 25.7% of sales in 2002.
Operating income in 2003 increased 64.0% to $26.1 million or 7.7% of sales
compared to $15.9 million or 5.6% of sales in the prior year. The improvement in
operating income and operating margin were primarily due to higher sales and the
associated operating leverage.
Interest expense was $2.0 million in 2003 compared to $2.7 million in 2002 due
to lower average debt levels in 2003. Other expense, net, consisting of gains
and losses on the disposal of assets, interest income, royalties and foreign
currency items was $0.1 million compared to other income, net, of $1.8 million
in the prior year. The primary reasons for the more favorable 2002 results were
gains on asset sales, higher interest income and more favorable currency
effects.
Income before taxes was $24.0 million in 2003 compared to $15.0 million in 2002.
Income tax expense was $8.6 million in 2003 compared to $5.4 million the prior
year. Net income in 2003 was $15.3 million, compared to $9.6 million in 2002.
The Company's effective tax rate was 36.0% in both 2003 and 2002. Diluted
earnings per share increased to $0.70 in 2003 compared to $0.44 in 2002.
Liquidity and Capital Resources
The Company has historically financed capital expenditures through cash flows
from operations. Management expects that cash flows from operations and
available lines of credit will be sufficient to support both its operations and
its debt obligations for the foreseeable future.
The Company has a domestic unsecured revolving credit line of $50.0 million. The
revolving line of credit balance becomes due within the next year. At January 1,
2005, the Company had $17.5 million in borrowings against this credit line. The
Company's subsidiary in Japan also has an unsecured credit line of Yen 0.9
billion or an equivalent of $9.0 million. The revolving line of credit becomes
due within the next year. At January 1, 2005, the Company had an equivalent of
$5.4 million in borrowings against the Yen facility. The Company intends to
renew these lines of credit upon maturity.
The Company's bank credit agreement requires maintenance of certain financial
ratios and a minimum net worth level. At January 1, 2005, the Company was in
compliance with these covenants. If the Company were to default on any of the
bank agreement debt covenants and were unable to obtain a waiver from the
lenders, the debt would be callable by the lenders. The Company believes that
default of any of the debt covenants is unlikely for the foreseeable future
since it expects the results of operations to be within the minimum levels to
continue to be in compliance with the debt covenants.
The Company started 2004 with $22.1 million of cash. Net cash provided by
operations was $53.0 million in the year. Cash used in investing activities
included $22.0 million in net purchases of property, plant and equipment and
$41.7 million for the acquisition of Heinrich. Cash provided by financing
activities included net proceeds of long-term debt of $3.8 million and cash
proceeds from the exercise of stock options of $16.5 million partially offset by
the purchase of $5.6 million of treasury stock. The effect of exchange rate
changes increased cash by $2.5 million. The net cash provided by operations and
financing activities, less investing activities plus the effect of exchange
rates, resulted in a $6.5 million net increase in cash. This left the Company
with a cash balance of $28.6 million at the end of 2004.
Increases in net working capital consumed $15.1 million of cash flow in 2004.
Excluding the impact of working capital from the Heinrich acquisition, the major
factors contributing to higher working capital were an increase in accounts
receivable of $6.6 million, an increase in inventory of $4.3 million and a
decrease in accounts payable and accrued expenses of $7.7 million partially
offset by a decrease in prepaid expenses and other of $3.5 million. The 2004
working capital increase was partly due to slower sales near the end of the
fiscal year 2004 and severance payments related to the Teccor acquisition. Net
working capital (working capital less cash, marketable securities and the
current portion of long-term debt) as a percent of sales was 19.7% at year-end
2004 compared to 18.3% at year-end 2003 and 20.9% at year-end 2002. The days
sales outstanding in accounts receivable increased to 57 days at year-end 2004
compared to 50 days at year-end 2003 and 54 days at year-end 2002. The increase
was partly due to the addition of Heinrich, which has a longer accounts
receivable collection cycle than the base Littelfuse business. Days inventory
outstanding was 90 days at year-end 2004 compared to 71 days at year-end 2003
and 88 days at year-end 2002.
The ratio of current assets to current liabilities was 1.8 to 1 at year-end 2004
compared to 1.8 to 1 at year-end 2003 and 2.3 to 1 at year-end 2002. The ratio
of long-term debt to equity was 0.1 to 1 at year-end 2004 compared to 0.0 to 1
at year-end 2003 and 0.1 to 1 at year-end 2002.
The Company started 2003 with $27.8 million of cash. Net cash provided by
operations was $50.0 million in the year. Cash used in investing activities
included $14.0 million in purchases of property, plant and equipment, $44.6
million for the acquisition of Teccor and $8.8 million in net proceeds from the
sale of marketable securities. Cash used in financing activities included net
payments of long-term debt of $11.5 million partially offset by cash proceeds
from the exercise of stock options of $4.3 million. The effect of exchange rate
changes increased cash by $1.5 million. The net cash provided by operations and
financing activities, less investing activities plus the effect of exchange
rates, resulted in a $5.6 million net decrease in cash. This left the Company
with a cash balance of $22.1 million at the end of 2003.
Decreases in net working capital provided $20.1 million of cash flow in 2003.
The major factors contributing to lower working capital were a decrease in
inventory of $5.9 million, a $12.5 million increase in accounts payable and
accrued expenses and a $1.3 million reduction in prepaid and other items. Net
working capital (working capital less cash, marketable securities and the
current portion of long-term debt) as a percent of sales was 18.3% at year-end
2003 compared to 20.9% at year-end 2002 and 21.8% at year-end 2001. The days
sales outstanding in accounts receivable decreased to 50 days at year-end 2003
compared to 54 days at year-end 2002 and 61 days at year-end 2001. Days
inventory outstanding was 71 days at year-end 2003 compared to 88 days at
year-end 2002 and 99 days at year-end 2001.
The Company's net capital expenditures were $22.1 million in 2004, $14.0 million
in 2003 and $8.4 million in 2002. The Company expects that capital expenditures
in 2005 will be higher than 2004. The primary purposes for capital expenditures
in 2005 will be for new product tooling, production equipment, facility
expansion and capital spending related to Teccor. As in 2004, the Company
expects to finance capital expenditures in 2005 through cash flow from
operations.
The Company increased total debt by $3.8 million in 2004 after decreasing debt
by $11.5 million in 2003 and $13.0 million in 2002. The Company is required to
repay $10.0 million of its Senior Notes in 2005. The Company expects to repay
this note with cash from operations. Separately, the Company has $5.4 million in
renewable foreign credit facilities outstanding at January 1, 2005, due in 2005.
The Company's Board of Directors has authorized the Company to repurchase shares
of its common stock, from time to time, depending on market conditions. The
Company repurchased 168,400 common shares for $5.6 million in 2004, zero common
shares in 2003 and 225,800 common shares for $3.6 million in 2002.
Contractual Obligations
The following table summarizes contractual obligations and commitments, as of
January 1, 2005 (in thousands):
Payment Due By Period
-------------------------------------
Less than More than
Contractual Obligations Total 1 year 1 - 3 years 3 - 5 years 5 years
- ----------------------- -------- --------- ----------- ----------- ---------
Long-term debt obligations $ 34,322 $ 32,958 $ 132 $ 1,232 $ --
Interest payments 1,088 956 70 62 --
Operating lease payments 10,684 4,371 3,781 1,848 684
-------- -------- ------- ------- -------
Total $ 46,094 $ 38,285 $ 3,983 $ 3,142 $ 684
-------- -------- ------- ------- -------
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 151, "Inventory Costs An
Amendment of Accounting Research Bulletin No. 43, Chapter 4". SFAS 151 clarifies
that abnormal amounts of idle facility expense, freight, handling costs and
spoilage should be expensed as incurred and not included as overhead. SFAS 151
also requires that the allocation of fixed production overhead to conversion
costs be based on normal capacity of the production facilities. SFAS 151 must be
applied prospectively beginning January 1, 2006. The adoption of SFAS 151 is not
expected to have a material impact on the Company's consolidated financial
statements.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 123R, "Share-Based
Payment," replacing SFAS No. 123 and superseding Accounting Principles Board
(APB) Opinion No. 25. SFAS 123R requires public companies to recognize
compensation expense for the cost of awards of equity compensation effective
July 1, 2005. This compensation cost will be measured as the fair value of the
award estimated using an option-pricing model on the grant date. The Company is
currently evaluating the various transition provisions under SFAS 123R and will
adopt SFAS 123R effective July 1, 2005, which is expected to result in increased
compensation expense in future periods.
Critical Accounting Policies
Certain of the accounting policies as discussed below require the application of
significant judgment by management in selecting the appropriate estimates and
assumptions for calculating amounts to record in the financial statements.
Actual results could differ from those estimates and assumptions, impacting the
reported results of operations and financial position. Significant accounting
policies are more fully described in the notes to the audited financial
statements included elsewhere in this Annual Report. Certain accounting
policies, however, are considered to be critical in that they are most important
to the depiction of the Company's financial condition and results of operations
and their application requires management's subjective judgment in making
estimates about the effect of matters that are inherently uncertain.
Allowance for Doubtful Accounts: The Company evaluates the collectibility of its
trade receivables based on a combination of factors. The Company regularly
analyzes its significant customer accounts and, when the Company becomes aware
of a specific
customer's inability to meet its financial obligations, the Company records a
specific reserve for bad debt to reduce the related receivable to the amount the
Company reasonably believes is collectible. The Company also records allowances
for all other customers based on a variety of factors including the length of
time the receivables are past due, the financial health of the customer,
macroeconomic considerations and historical experience. Historically, the
allowance for doubtful accounts has been adequate to cover bad debts. If
circumstances related to specific customers change, the estimates of the
recoverability of receivables could be further adjusted. However, due to the
Company's diverse customer base and lack of credit concentration, the Company
does not believe its estimates would be materially impacted by changes in its
assumptions.
Credit Memos: The Company evaluates sales activity for credits to be issued on
sales recorded prior to the end of the fiscal year. These credits relate to the
return of inventory, pricing adjustments and credits issued to a customer based
upon achieving prearranged sales volumes. Volume based incentives offered to
customers are based upon the estimated cost of the program and are recorded as
products are sold.
Inventory: The Company performs a detailed assessment of inventory, which
includes a review of, among other factors, demand requirements, product life
cycle and development plans, component cost trends, product pricing and quality
issues. Based on the analysis, the Company records adjustments to inventory for
excessiveness, obsolescence or impairment when appropriate to reflect inventory
at net realizable value. Historically, inventory reserves have been adequate to
reflect inventory at net realizable values. Revisions to inventory adjustments
may be required if actual demand, component costs or product life cycles differ
from estimates. However, due to the Company's diverse product lines and end user
markets, the Company does not believe its estimates would be materially impacted
by changes in its assumptions.
Goodwill and Other Intangibles: Purchase accounting requires the use of
accounting estimates and judgments to allocate the purchase price to the fair
market value of the assets purchased and liabilities assumed. The Company has
accounted for its acquisitions using the purchase method of accounting.
The Company determined the fair value of each of its reporting units by
calculating an EBITDA for each business segment and applying a multiple based
upon recent acquisition experience. In making these projections, the Company
considered the markets it was addressing, the competitive environment and its
advantages. The Company determined that the fair value of each of the reporting
units exceeded their carrying amounts and, therefore, no goodwill impairment
existed. The Company will continue to perform a goodwill impairment test on an
annual basis and on an interim basis, if certain conditions exist. Factors the
Company considers important, which could result in changes to its estimates,
include underperformance relative to historical or projected future operating
results and declines in acquisition and trading multiples. Due to the diverse
end user base and non-discretionary product demand, the Company does not believe
its future operating results will vary significantly relative to its historical
and projected future operating results.
Long-Lived Assets: The Company evaluates long-lived assets on an ongoing basis.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the related asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the asset to future undiscounted cash flows
expected to be generated by the asset. If the asset is determined to be
impaired, the impairment recognized is measured by the amount by which the
carrying value of the asset exceeds its fair value. The Company's estimates of
future cash flows from such assets could be impacted if it underperforms
relative to historical or projected future operating results. However, due to
the Company's diverse product lines and end user markets, the Company does not
believe its estimates would be materially impacted by changes in its
assumptions.
Pension and Other Post-retirement Benefits: Accounting for pensions requires
estimating the future benefit cost and recognizing the cost over the employee's
expected period of employment with the Company. Certain assumptions are required
in the calculation of pension costs and obligations. These assumptions include
the discount rate, salary scales and the expected long-term rate of return on
plan assets. The discount rate is intended to represent the rate at which
pension benefit obligations could be settled by purchase of an annuity contract.
These assumptions are subject to change based on stock and bond market returns
and other economic factors. Actual results that differ from the Company's
assumptions are accumulated and amortized over future periods and therefore
generally affect its recognized expense and accrued liability in such future
periods. While the Company believes that its assumptions are appropriate given
current economic conditions and its actual experience, significant differences
in results or significant changes in the Company's assumptions may materially
affect its pension obligations and related future expense.
Environmental Liabilities: Environmental liabilities are accrued based on
estimates of the probability of potential future environmental exposure and are
discounted based upon certain assumptions. Expenses related to on-going
maintenance of environmental sites are expensed as incurred. If actual or
estimated probable future losses exceed the Company's recorded liability for
such claims, it would record additional charges as other expense during the
period in which the actual loss or change in estimate occurred.
Other Contingencies: In the ordinary course of business, the Company is involved
in legal proceedings involving contractual and employment relations, product
liability claims, trademark rights and a variety of other matters. The Company
records contingent liabilities resulting from claims against it when it is
probable that a liability has been incurred and the amount of the loss is
reasonably estimable. The Company discloses contingent liabilities when there is
a reasonable possibility that the ultimate loss will exceed the recorded
liability. Estimating probable losses requires analysis of multiple factors, in
some cases including judgments about the potential actions of third party
claimants and courts. Therefore, actual losses in any future period are
inherently uncertain. Currently, the Company does not believe that any of its
pending legal proceedings or claims will have a material impact on its financial
position or results of operations. However, if actual or estimated probable
future losses exceed the Company's recorded liability for such claims, it would
record additional charges as other expense during the period in which the actual
loss or change in estimate occurred.
Market Risk
The Company is exposed to market risk from changes in interest rates, foreign
exchange rates and commodities.
The Company had long-term debt outstanding at January 1, 2005, in the form of
Senior Notes at fixed interest rates and a foreign
line of credit at variable rates. While 71% of this debt has variable interest
rates, the Company's interest expense is not materially sensitive to changes in
interest rate levels since debt levels and potential interest expense increases
are small relative to earnings.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign countries. The Company has manufacturing facilities in
Mexico, the U.K., Ireland, Switzerland, Germany, Hungary, Poland, China and the
Philippines. During 2004, sales exported from the United States or manufactured
abroad accounted for 60% of total sales. Substantially all sales in Europe are
denominated in Euro, U.S. Dollar and British Pound Sterling, and substantially
all sales in the Asia-Pacific region are denominated in U.S. Dollar, Japanese
Yen and South Korean Won.
The Company's identifiable foreign exchange exposures result from the purchase
and sale of products from affiliates, repayment of intercompany trade and loan
amounts and translation of local currency amounts in consolidation of financial
results. As international sales were more than half of total sales, a
significant portion of the resulting accounts receivable are denominated in
foreign currencies. Changes in foreign currency exchange rates or weak economic
conditions in the foreign countries in which it manufactures and distributes
products could affect the Company's sales, accounts receivable values and
financial results. The Company uses netting and offsetting intercompany account
management techniques to reduce known foreign currency exposures where possible
and also considers the use of derivative instruments to hedge certain foreign
currency exposures deemed to be material. The Company has entered into cross
currency interest rate swaps, as discussed in Note 8 of the Notes to
Consolidated Financial Statements, designated as a cash flow hedge of the
foreign currency exchange rate risk associated with forecasted intercompany
sales transactions denominated in Japanese Yen.
The Company uses various metals in the production of its products, including
zinc, copper, silver and platinum. The Company's earnings are exposed to
fluctuations in the prices of these commodities. The Company does not currently
use derivative financial instruments to mitigate this commodity price risk.
The Company does not believe it has significant exposure to market risk from
changes in interest rates, foreign exchange rates and
commodities.
Outlook
Sales in 2005 are expected to improve slightly in the automotive and electrical
markets. Sales in the electronics market are expected to be weak early in the
year and improve as the year progresses. The Company believes its long-term
growth strategy, which emphasizes development of new circuit protection products
and providing customers with solutions and technical support in all major
regions of the world, will drive sales growth in all of its markets.
With the expectation of continued pricing pressure, the Company initiated a
manufacturing rationalization program in 2001 emphasizing consolidation of
plants and transfer of manufacturing to lower cost locations. The program
involved manufacturing plant closures in the U.S., the U.K. and Korea and
workforce reductions in Ireland. The program was substantially completed as of
January 1, 2005. The Company initiated a new series of projects in 2004 to
consolidate and reduce costs in its global manufacturing and distribution
operations. These programs are expected to generate cost savings to more than
offset price erosion in 2005. The benefits of these programs are expected to
have a favorable impact on earnings in 2005. The Company also plans to increase
research and development spending to accelerate new product development in order
to help drive future sales growth.
The Company is working to expand its market share in the overvoltage circuit
protection market with the addition of products and technology through the
Semitron Industries, Harris Suppression Products and Teccor acquisitions and the
ability to offer customers total circuit protection solutions. The Company will
also look for opportunities to add to its strong position in the overcurrent
protection market, as with the recent Heinrich acquisition. The Company remains
committed to investing in new product development and technical resources to
provide customers with overcurrent and overvoltage circuit protection solutions
and expertise.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995
The statements in this section, the letter to shareholders and in the other
sections of this report, which are not historical facts are forward-looking
statements that involve risks and uncertainties, including, but not limited to,
product demand and market acceptance risks, the effect of economic conditions,
the impact of competitive products and pricing, product development and patent
protection, commercialization and technological difficulties, capacity and
supply constraints or difficulties, exchange rate fluctuations, actual purchases
under agreements, the effect of the Company's accounting policies, labor
disputes, restructuring costs in excess of expectations, pension plan asset
returns less than assumed, integration of acquisitions, and other risks which
may be detailed in the Company's Securities and Exchange Commission filings.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Littelfuse, Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting as such term is
defined in Exchange Act Rules 13a-15(f). Littelfuse, Inc.'s internal control
system was designed to provide reasonable assurance to the company's management
and the board of directors regarding the preparation and fair presentation of
published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined effective can provide
only reasonable assurance with respect to financial statement preparation and
presentation.
An internal control significant deficiency is a control deficiency, or
combination of control deficiencies, that adversely affects the company's
ability to initiate, authorize, record, process, or report external financial
data reliably in accordance with generally accepted accounting principles such
that there is more than a remote likelihood that a misstatement of the
company's annual or interim financial statements that is more than
inconsequential will not be prevented or detected. An internal control material
weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
Littelfuse, Inc.'s management assessed the effectiveness of the Company's
internal control over financial reporting as of January 1, 2005 based upon the
framework in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). This assessment
identified material weaknesses in the Company's approval process over journal
entries and a lack of adequate controls over the accounting for foreign currency
translations. Specifically, certain managers had the ability to record journal
entries of significant amounts in the Company's consolidation process without
adequate review or supporting documentation. Additionally, a number of
adjustments to the amounts reported in the Consolidated Balance Sheet and
Statement of Cash flows were needed due to the failure and lack of controls
mentioned above. The Company recorded an adjustment to increase both accrued
liabilities and inventory without adequate support review that was subsequently
corrected after it was determined it was recorded in error. The increase in
accrued liabilities should have been an increase to foreign currency
translation. Additionally, two significant adjustments were made to correct the
amount reported as "Effect of exchange rate changes in cash" in the consolidated
statements of Cash Flows, which impacted cash flows from operating activities
and cash flows from financing activities. Because of the material weaknesses
described above, management concluded that, as of January 1, 2005, the Company's
internal control over financial reporting was not effective based on those
criteria.
Littelfuse, Inc.'s independent registered public accounting firm, Ernst & Young
LLP, have issued an audit report on our assessment of the Company's internal
control over financial reporting and the effectiveness of the Company's internal
control over financial reporting. This report appears on page 24.
REMEDIATION STEPS TO ADDRESS MATERIAL WEAKNESS
The company has implemented the following remediation steps to address the
material weakness discussed above:
- Additional procedures have been implemented over the journal entry
approval process.
- The Company will hire additional financial reporting personnel who
have relevant experience with foreign currency translation.
- Additional procedures will be implemented to review on a quarterly
basis the foreign currency translation component of accumulated
comprehensive income and the impact of foreign exchange on cash and
cash equivalents.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF LITTELFUSE, INC.
We have audited the accompanying consolidated balance sheets of Littelfuse, Inc.
and subsidiaries as of January 1, 2005 and January 3, 2004, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended January 1, 2005. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Littelfuse, Inc.
and subsidiaries at January 1, 2005 and January 3, 2004, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended January 1, 2005, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Littelfuse,
Inc.'s internal control over financial reporting as of January 1, 2005, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 11, 2005 expressed an unqualified opinion on management's assessment
and an adverse opinion on the effectiveness of internal control over financial
reporting.
Ernst & Young LLP
Chicago, Illinois
March 16, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF LITTELFUSE, INC.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that
Littelfuse, Inc. did not maintain effective internal control over financial
reporting as of January 1, 2005, because of the effect of inadequate review and
supporting documentation for certain journal entries recorded in the Company's
consolidation process and a lack of adequate control over the accounting for
foreign currency translation, based on criteria established in Internal
Control-- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Littelfuse's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weaknesses have been identified and included
in management's assessment: The ability of certain managers to record journal
entries of significant amounts in the Company's consolidation process without
adequate review or supporting documentation and a lack of adequate controls over
the accounting for foreign currency translation both represent a material
weakness as defined above. As a result of these material weaknesses, we noted
several journal entries and adjustments affecting amounts reported in the
Consolidated Balance Sheet as of January 1, 2005 and the Statement of Cash Flows
for the year ended January 1, 2005 that were recorded in error but were
subsequently corrected by the Company. These material weaknesses were considered
in determining the nature, timing, and extent of audit tests applied in our
audit of the January 1, 2005 consolidated financial statements, and this report
does not affect our report dated March 11, 2005 on those financial statements.
In our opinion, management's assessment that Littelfuse, Inc. did not maintain
effective internal control over financial reporting as of January 1, 2005, is
fairly stated, in all material respects, based on the COSO control criteria.
Also, in our opinion, because of the effect of the material weakness described
above on the achievement of the objectives of the control criteria, Littelfuse,
Inc. has not maintained effective internal control over financial reporting as
of January 1, 2005, based on the COSO control criteria.
Ernst & Young LLP
Chicago, Illinois
March 16, 2005
Consolidated Balance Sheets
(In thousands) January 1, 2005 January 3, 2004
- -------------- --------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 28,583 $ 22,128
Accounts receivable, less allowances
(2004 - $10,230; 2003 - $7,470) 77,726 52,149
Inventories 79,080 52,598
Deferred income taxes 17,056 17,096
Prepaid expenses and other current assets 6,804 5,169
--------- ----------
Total current assets 209,249 149,140
Property, plant, and equipment:
Land 13,997 8,572
Buildings 56,041 38,531
Equipment 233,481 205,697
--------- ----------
303,519 252,800
Accumulated depreciation (167,054) (154,321)
--------- ----------
136,465 98,479
Intangible assets, net of amortization:
Patents, licenses and software 2,908 17
Distribution network 8,750 4,113
Trademarks 7,393 7,813
Goodwill 55,249 48,643
--------- ----------
74,301 60,586
Investments 4,886 2,543
Other assets 408 822
--------- ----------
Total assets $ 425,309 $ 311,570
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,752 $ 15,206
Accrued payroll 22,065 20,894
Accrued expenses 16,834 7,440
Accrued severance related to acquisitions 8,722 7,637
Accrued income taxes 14,823 13,715
Current portion of long-term debt 32,958 18,496
--------- ----------
Total current liabilities 115,154 83,388
Long-term debt, less current portion 1,364 10,201
Deferred income taxes 8,573 --
Accrued post-retirement benefits 20,417 4,564
Other long-term liabilities 7,081 1,072
Minority Interest 2,636 143
Shareholders' equity:
Preferred stock, par value $0.01 per share:
1,000,000 shares authorized; no shares issued
and outstanding -- --
Common stock, par value $0.01 per share:
34,000,000 shares authorized; shares issued
and outstanding, 2004 - 22,549,595; 2003 -
22,002,119 225 220
Additional paid-in capital 96,008 75,859
Notes receivable - common stock (3,550) (3,550)
Accumulated other comprehensive income (loss) 3,673 (3,042)
Retained earnings 173,728 142,715
Total shareholders' equity 270,084 212,202
--------- ---------
Total liabilities and shareholders' equity $ 425,309 $ 311,570
========= =========
See accompanying notes.
Consolidated Statements of Income
(In thousands, except per share amounts)
Year Ended January 1, 2005 January 3, 2004 December 28, 2002
- ------------------------------------------------------- --------------- --------------- -----------------
Net sales $ 500,242 $ 339,410 $ 283,267
Cost of sales 321,288 234,984 194,644
--------- --------- ---------
Gross profit 178,954 104,426 88,623
Selling, general and administrative expenses 99,781 68,579 63,591
Research and development expenses 17,464 8,694 8,334
Impairment of long-term investment 2,277 -- --
Amortization of intangibles 2,441 1,072 767
--------- --------- ---------
Operating income 56,991 26,081 15,931
Interest expense 1,491 2,045 2,653
Other expense (income), net 89 68 (1,753)
--------- --------- ---------
Income before income taxes and minority interest 55,411 23,968 15,031
Minority interest 153 -- --
Income taxes 19,230 8,629 5,411
--------- --------- ---------
Net income $ 36,028 $ 15,339 $ 9,620
========= ========= =========
Net income per share:
Basic $ 1.62 $ 0.70 $ 0.44
Diluted $ 1.59 $ 0.70 $ 0.44
--------- --------- ---------
Weighted-average shares and equivalent shares outstanding:
Basic 22,239 21,881 21,858
Diluted 22,604 22,004 21,971
See accompanying notes.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended January 1, 2005 January 3, 2004 December 28, 2002
- -------------------------------------------------------- --------------- --------------- -----------------
Operating activities
Net income $ 36,028 $ 15,339 $ 9,620
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 23,859 20,029 18,137
Amortization of intangibles 2,441 1,072 767
Impairment of long-term investment 2,277 -- --
Provision for bad debts 802 50 356
Deferred income taxes 4,498 (6,458) (575)
Other (1,805) (205) 651
Changes in operating assets and liabilities:
Accounts receivable (6,582) 387 2,794
Inventories (4,277) 5,865 4,762
Accounts payable and accrued expenses (7,709) 12,584 3,296
Prepaid expenses and other 3,452 1,290 950
-------- ---------- ---------
Net cash provided by operating activities 52,984 49,953 40,758
Investing activities
Purchases of property, plant and equipment, net (22,079) (14,041) (8,360)
Purchase of businesses, net of cash acquired (41,661) (44,590) (15,031)
Purchase of marketable securities -- (1,598) (13,747)
Sale of marketable securities -- 10,404 4,941
-------- ---------- ---------
Net cash used in investing activities (63,740) (49,825) (32,197)
Financing activities
Proceeds from long-term debt 42,200 30,500 112
Payments of long-term debt (38,402) (41,996) (13,130)
Proceeds from exercise of stock options and warrants 16,520 4,291 1,614
Purchases of common stock and redemption of warrants (5,604) -- (3,556)
-------- ---------- ---------
Net cash provided by (used in) financing activities 14,714 (7,205) (14,960)
Effect of exchange rate changes on cash 2,497 1,455 (378)
-------- ---------- ---------
Increase (decrease) in cash and cash equivalents 6,455 (5,622) (6,777)
Cash and cash equivalents at beginning of year 22,128 27,750 34,527
-------- ---------- ---------
Cash and cash equivalents at end of year $ 28,583 $ 22,128 $ 27,750
======== ========== =========
See accompanying notes.
Consolidated Statements of Shareholders' Equity
Notes Accumulated
Additional Receivable- Other
Common Paid-In Common Comprehensive Retained
(In thousands) Stock Capital Stock Income (Loss) Earnings Total
- -------------------------------------------- --------- ---------- ----------- ------------- ---------- ---------
Balance at December 29, 2001 $ 219 $ 70,641 $(3,448) $(10,265) $ 120,522 $ 177,669
Comprehensive income:
Net income for the year -- -- -- -- 9,620 9,620
Change in net unrealized loss on derivatives -- -- -- (231) -- (231)
Minimum pension liability adjustment,
net of tax -- -- -- (3,462) -- (3,462)
Foreign currency translation adjustment -- -- -- 4,057 -- 4,057
--------- -------- ------- -------- --------- ---------
Comprehensive income 9,984
Stock options and warrants exercised* 1 2,065 (452) -- -- 1,614
Purchase of 225,800 shares of common stock (2) (788) -- -- (2,766) (3,556)
--------- -------- ------- -------- --------- ---------
Balance at December 28, 2002 $ 218 $ 71,918 $(3,900) $ (9,901) $ 127,376 $ 185,711
Comprehensive income:
Net income for the year -- -- -- -- 15,339 15,339
Change in net unrealized loss on derivatives -- -- -- (770) -- (770)
Minimum pension liability adjustment,
net of tax -- -- -- 3,216 -- 3,216
Foreign currency translation adjustment -- -- -- 4,413 -- 4,413
--------- -------- ------- -------- --------- ---------
Comprehensive income 22,198
Payments on notes receivable -- -- 350 -- -- 350
Stock options and warrants exercised* 2 3,941 -- -- -- 3,943
--------- -------- ------- -------- --------- ---------
Balance at January 3, 2004 $ 220 $ 75,859 $(3,550) $ (3,042) $ 142,715 $ 212,202
Comprehensive income:
Net income for the year -- -- -- -- 36,028 36,028
Change in net unrealized loss on derivatives -- -- -- 824 -- 824
Minimum pension liability adjustment, net of tax -- -- -- (458) -- (458)
Unrealized loss on marketable securities -- -- -- (1,095) -- (1,095)
Foreign currency translation adjustment -- -- -- 7,444 -- 7,444
--------- -------- ------- -------- --------- ---------
Comprehensive income 42,743
Purchase of 168,400 shares of common stock (2) (587) -- -- (5,015) (5,604)
Stock options and warrants exercised* 7 20,736 -- -- -- 20,743
Balance at January 1, 2005 $ 225 $ 96,008 $(3,550) $ 3,673 $ 173,728 $ 270,084
--------- -------- ------- -------- --------- ---------
*Including related tax benefit.
See accompanying notes.
Notes to Consolidated Financial Statements
January 1, 2005 and January 3, 2004
1. Summary of Significant Accounting Policies and Other Information
Nature of Operations: Littelfuse, Inc. and its subsidiaries (the Company)
design, manufacture, and sell circuit protection devices for use in the
automotive, electronic and electrical markets throughout the world.
Fiscal Year: The Company's fiscal years ended January 1, 2005, January 3, 2004,
and December 28, 2002, and contained 52, 53 and 52 weeks, respectively.
Basis of Presentation: The consolidated financial statements include the
accounts of Littelfuse, Inc. and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated. Certain amounts reported in
previous years have been reclassified to conform to the 2004 presentation.
Cash Equivalents: All highly liquid investments, with a maturity of three months
or less when purchased, are considered to be cash equivalents.
Investments: The Company has determined that all of its investment securities
are to be classified as available-for-sale. Available-for-sale securities are
carried at fair value with the unrealized gains and losses reported in
"Shareholders' Equity" as a component of "Accumulated Other Comprehensive Income
(Loss)." The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in other
income or expense. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
Fair Value of Financial Instruments: The Company's financial instruments include
cash and cash equivalents, accounts receivable, investments and long-term debt.
The carrying values of such financial instruments approximate their estimated
fair values.
Accounts Receivable: The Company performs credit evaluations of customers'
financial condition and generally does not require collateral. Credit losses are
provided for in the financial statements based upon specific knowledge of a
customer's inability to meet its financial obligations to the Company.
Historically, credit losses have consistently been within management's
expectations and have not been a material amount. The Company also maintains
allowances against accounts receivable for the settlement of rebates and sales
discounts to customers. These allowances are based upon specific customer sales
and sales discounts as well as actual historical experience.
Inventories: Inventories are stated at the lower of cost (first in, first out
method) or market, which approximates current replacement cost. The Company
maintains excess and obsolete allowances against inventory to reduce the
carrying value to the expected net realizable value. These allowances are based
upon a combination of factors including historical sales volume, market
conditions, lower of cost or market analysis and expected realizable value of
the inventory.
Property, Plant and Equipment: Land, buildings, and equipment are carried at
cost. Depreciation is calculated using the straight-line method with useful
lives of 21 years for buildings, seven to nine years for equipment, seven years
for furniture and fixtures, five years for tooling and three years for computer
equipment. Prior to 2004, depreciation was calculated under accelerated methods
with useful lives of 21 years for buildings, seven to nine years for equipment,
and seven years for furniture and fixtures. The impact of this prospective
change in depreciating new asset purchases was not material in 2004.
Intangible Assets: Trademarks and tradenames are amortized using the
straight-line method over estimated useful lives that have a range of five to
twenty years. Patents and licenses are amortized using the straight-line method
over estimated useful lives that have a range of four to nine years. The
distribution networks are amortized on either a straight-line or accelerated
basis over estimated useful lives that have a range of nine to twenty years.
Goodwill is subject to an annual impairment test. Impairment is determined by
calculating the fair value of each of the business segments by calculating an
EBITDA for each business segment and applying a multiple based upon recent
acquisition experience. In making these projections, the Company considered the
markets it was addressing, the competitive environment and its advantages. The
Company determined that the fair value of each of the reporting units exceeded
their carrying amounts and, therefore, no goodwill impairment existed. The
Company will continue to perform a goodwill impairment test on an annual basis
and on an interim basis, if certain conditions exist. Factors the Company
considers important, which could result in changes to its estimates, include
underperformance relative to historical or projected future operating results
and declines in acquisition and trading multiples. Due to the diverse end user
base and non-discretionary product demand, the Company does not believe its
future operating results will vary significantly relative to its historical and
projected future operating results.
Pension and Other Post-retirement Benefits: Accounting for pensions requires
estimating the future benefit cost and recognizing the cost over the employee's
expected period of employment with the Company. Certain assumptions are required
in the calculation of pension costs and obligations. These assumptions include
the discount rate, salary scales and the expected long-term rate of return on
plan assets. The discount rate is intended to represent the rate at which
pension benefit obligations could be settled by purchase of an annuity contract.
These assumptions are subject to change based on stock and bond market returns
and other economic factors. Actual results that differ from the Company's
assumptions are accumulated and amortized over future periods and therefore
generally affect its recognized expense and accrued liability in such future
periods. While the Company believes that its assumptions are appropriate given
current economic conditions and its actual experience, significant differences
in results or significant changes in the Company's assumptions may materially
affect its pension obligations and related future expense.
Environmental Liabilities: Environmental liabilities are accrued based on
estimates of the probability of potential future environmental exposure and are
discounted based upon certain assumptions. Expenses related to on-going
maintenance of environmental sites are expensed as incurred. If actual or
estimated probable future losses exceed the Company's recorded liability for
such claims, it would record additional charges as other expense during the
period in which the actual loss or change in estimate occurred.
Revenue Recognition: In accordance with the Staff Accounting Bulletin (SAB) No.
104, "Revenue Recognition," issued in December
2003, sales and associated costs are recognized in accordance with customer
shipping terms, which is when the transfer of title to the customer occurs. Such
revenue is recognized when collectibility is reasonably assured.
Credit Memos: The Company evaluates sales activity for credits to be issued on
sales recorded prior to the end of the fiscal year. These credits relate to the
return of inventory, pricing adjustments and credits issued to a customer based
upon achieving prearranged sales volumes. Volume based incentives offered to
customers are based upon the estimated cost of the program and are recorded as
products are sold.
Advertising Costs: The Company expenses advertising costs as incurred, which
amounted to $2.2 million in 2004, $1.2 million in 2003 and $2.1 million in 2002.
Foreign Currency Translation: The Company's foreign subsidiaries use the local
currency as their functional currency. Accordingly, assets and liabilities are
translated using exchange rates at the balance sheet date and revenues and
expenses are translated at weighted average rates. Adjustments from the
translation process are reflected in shareholders' equity.
Derivative Instruments: The Company recognizes derivatives as either assets or
liabilities on the Consolidated Balance Sheets and measures those instruments at
fair value. The accounting for changes in the fair value of a derivative depends
on the intended use and designation of the derivative instrument. For
derivatives designated as cash flow hedges, the effective portion of the
derivative's gain or loss is initially reported as a component of accumulated
other comprehensive loss and subsequently reclassified into earnings when the
hedged exposure affects earnings. Derivative financial instruments involve, to a
varying degree, elements of market and credit risk not recognized in the
consolidated financial statements. The market risk associated with these
instruments resulting from interest rate movements is expected to offset the
market risk of the underlying transactions being hedged. The counterparties to
the agreements relating to the Company's cross currency rate instruments consist
of major international financial institutions with high credit ratings. The
Company does not believe that there is significant risk of non-performance by
these counterparties because the Company monitors the credit ratings of such
counterparties, and limits the financial exposure and amount of agreements
entered into with any one financial institution. While the notional amounts of
the derivative financial instruments provides one measure of the volume of these
transactions, they do not represent the amount of the Company's exposure to
credit risk. The amounts potentially subject to credit risk (arising from the
possible inability of counterparties to meet the terms of their contracts) are
generally limited to the amounts, if any, by which the counterparties'
obligations under the contracts exceed the obligations of the Company to the
counterparty.
Stock-based Compensation: As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), the Company accounts for stock option
grants to employees and directors in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," using the intrinsic
value method. Generally, the Company grants stock options for a fixed number of
shares with an exercise price equal to the market price of the underlying stock
at the date of grant and, accordingly, does not recognize compensation expense.
On certain occasions, the Company has granted stock options for a fixed number
of shares with an exercise price below that of the underlying stock on the date
of the grant and recognizes compensation expense accordingly. This compensation
expense has not been material. See Note 10 for additional information on
stock-based compensation.
The following table discloses our pro forma net income and diluted net income
per share had the valuation methods under SFAS 123 been used for our stock
option grants. The table also discloses the weighted average assumptions used in
estimating the fair value using the Black-Scholes option pricing method.
(In thousands, except per share amounts) 2004 2003 2002
- --------------------------------------- ---------- ---------- ----------
Net income as reported $ 36,028 $ 15,339 $ 9,620
Stock option compensation expense, net of tax* (2,762) (2,520) (2,260)
---------- ---------- ----------
Pro forma net income $ 33,266 $ 12,819 $ 7,360
========== ========== ==========
Basic net income per share
As reported $ 1.62 $ 0.70 $ 0.44
Pro forma $ 1.50 $ 0.59 $ 0.34
Diluted net income per share
As reported $ 1.59 $ 0.70 $ 0.44
Pro forma $ 1.47 $ 0.58 $ 0.33
Risk-free interest rate 4.14% 3.45% 3.24%
Expected dividend yield 0% 0% 0%
Expected stock price volatility 44.0% 46.9% 41.4%
Expected life of options 7 years 7 years 7 years
- --------------------
* 2003 and 2002 expense amounts have been increased by $1,371 and $1,238,
respectively, from amounts previously presented. Proforma amounts were
adjusted accordingly.
These pro forma amounts may not be representative of future disclosures because
the estimated fair value of the options is amortized to expense over the vesting
period and additional options may be granted in the future.
Accounting Pronouncements: In November 2004, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 151,
"Inventory Costs - An Amendment to Accounting Research Bulletin No. 43, Chapter
4". SFAS 151 clarifies that abnormal amounts of idle facility expense, freight,
handling costs and spoilage should be expensed as incurred and not included as
overhead. SFAS 151 also requires that the allocation of fixed production
overhead to conversion costs be based on normal capacity of the production
facilities. SFAS 151 must be applied prospectively beginning January 1, 2006.
The adoption of SFAS 151 is not expected to have a material impact on the
Company's Consolidated Financial Statements.
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the U.S. requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Shipping and Handling Fees and Costs: Amounts billed to customers in a sales
transaction represent fees earned for the goods provided and, accordingly,
amounts billed related to shipping and handling should be classified as revenue.
Costs incurred for shipping and handling of $4.6 million, $4.3 million and $3.6
million in 2004, 2003 and 2002, respectively, are classified in Selling,
General, and Administrative expenses.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 123R, "Share-Based
Payment," replacing SFAS No. 123 and superseding Accounting Principles Board
(APB) Opinion No. 25. SFAS 123R requires public companies to recognize
compensation expense for the cost of awards of equity compensation effective
July 1, 2005. This compensation cost will be measured as the fair value of the
award estimated using an option-pricing model on the grant date. The Company is
currently evaluating the various transition provisions under SFAS 123R and will
adopt SFAS 123R effective July 1, 2005, which is expected to result in increased
compensation expense in future periods.
Restructuring Costs: The Company incurs severance charges and plant closure
expenses as part of the Company's on-going cost reduction efforts. These charges
are included in Cost of Sales or Selling, General and Administrative expense
depending on the nature of the charge.
2. Acquisition of Business
On May 6, 2004, the Company acquired 82% of the common stock of Heinrich
Industrie AG ("Heinrich") for Euro 39.5 million (approximately $47.1 million) in
cash and acquisition costs of approximately $1.8 million. The Company purchased
the controlling interest in Heinrich from its two largest shareholders and
initiated a tender offer for the remaining shares of the publicly held company.
The Company funded the acquisition with $17.5 million in cash and $32.0 million
of borrowings on an existing revolving line of credit.
Subsequent to May 6, 2004, the Company purchased additional shares of Heinrich
stock for approximately $8.7 million, bringing the total ownership to 97.2% as
of January 1, 2005.
Heinrich is the holding company for the Wickmann Group of circuit protection
products, which has three business units: electronic, automotive and electrical.
Littelfuse operates Heinrich in such business units subsequent to the
acquisition. The Heinrich acquisition expands the Company's product offerings
and strengthens the Company's position in the circuit protection industry.
The acquisition was accounted for using the purchase method and the operations
of Heinrich are included in the Company's operations from the date of
acquisition. The following table sets forth the purchase price allocation for
the acquisition of Heinrich in accordance with the purchase method of accounting
with adjustments to record the acquired assets and liabilities of Heinrich at
their estimated fair market or net realizable values.
Purchase price allocation (In thousands)
- ----------------------------------------
Current assets $ 39,824
Property, plant and equipment 35,826
Patents, licenses and software 3,396
Distribution network 5,135
Trademarks and tradenames 788
Goodwill 7,651
Other assets 5,282
Current liabilities (30,778)
Purchase accounting liabilities (7,281)
Other long-term liabilities (16,580)
Minority interest (1,602)
---------
$ 41,661
=========
All goodwill and intangible assets are recorded in the European segment.
Trademarks and tradenames have an estimated useful life of five years. The
distribution network has an average estimated useful life of nine years. Patents
have an estimated useful life of four years. Software has a useful life of three
years. The weighted average estimated useful life for intangible assets is
approximately seven years.
Purchase accounting liabilities are estimated to be $7.3 million and are for
redundancy costs to be paid through 2005 related to manufacturing operations and
selling, general and administrative functions. These liabilities are subject to
revision as the Company implements its plan. The Company began formulating its
plan to incur these costs as of the acquisition date. As of January 1, 2005,
approximately $0.1 million has been paid related to these liabilities.
The following unaudited pro forma consolidated financial information for the
Company has been prepared assuming the Heinrich acquisition had occurred on
December 29, 2002.
(In thousands, except per share data)
For the year ended 2004 2003
- ------------------------------------ --------- ----------
Net revenues $ 534,661 $ 433,242
Net income from operations 56,254 20,493
Net income 35,668 15,088
Diluted net income per share $ 1.58 $ 0.69
These unaudited pro forma results are presented for comparative purposes only.
The pro forma results are not necessarily indicative of what actual results
would have been had the Heinrich acquisition been completed as of the beginning
of the respective periods, or of future results.
On July 7, 2003, the Company completed the acquisition of all of the outstanding
stock of Teccor Electronics, Inc. (`Teccor'), a subsidiary of Invensys plc for
$44.6 million in cash, plus a future payment of $5.0 million contingent on sales
of Teccor products reaching $107.0 million for calendar year 2005. If the
contingent purchase price is to be paid it will be accounted for as an
adjustment to purchase price in accordance with EITF 95-8 "Accounting for
Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a
Purchase Business Combination", as the selling shareholder has had no
involvement in the Teccor business since the date of acquisition. The Company
does not believe that Teccor will achieve the sales level in 2005 which would
trigger the additional future payment. Teccor manufactures semiconductor
products for the telecommunications and industrial market segments, including
transient voltage suppression devices and power switching devices. The addition
of Teccor's transient voltage suppression products expands the Company's line of
overvoltage products and strengthens its position in the telecom and industrial
market segments. The acquisition was accounted for using the purchase method and
the operations of Teccor are included in the Company's operations from the date
of acquisition. The allocation of the purchase price resulted in no goodwill.
The acquisition was funded with cash on hand and borrowings under the Company's
$50.0 million revolving credit facility. The allocation of purchase price, net
of cash, is as follows:
(In thousands)
- --------------
Current assets $ 27,508
Property, plant and equipment 21,550
Intangible asset 6,100
Deferred tax assets 6,703
Current liabilities (9,985)
Purchase accounting liabilities (6,900)
Other long-term liabilities (386)
--------
Total purchase price, net of cash $ 44,590
========
Purchase accounting liabilities are estimated to be $6.9 million and are
primarily for redundancy costs related to manufacturing operations and selling,
general and administrative functions. The Company began formulating the plan to
incur these costs as of the acquisition date. Included in this amount is $0.7
million to reflect the obligation of Teccor to remit to Invensys proceeds from
the sale of land. As of January 1, 2005, $5.4 million of restructuring payments
related to employee severance have been paid and $1.4 million has been reversed
from the liability with an offsetting reduction to intangible assets, leaving a
balance of $0.1 million in purchase accounting liabilities at January 1, 2005.
The remaining accrued liabilities are expected to be paid by the end of the 2005
fiscal year.
The following unaudited pro forma consolidated financial information for the
Company has been prepared assuming the Teccor acquisition had occurred on
December 29, 2002.
(In thousands, except per share data)
For the year ended 2004 2003
- ------------------------------------ ---------- ---------
Net revenues $ 500,242 $ 375,797
Net income from operations 56,991 23,211
Net income 36,028 13,179
Diluted net income per share $ 1.59 $ 0.60
These unaudited pro forma results are presented for comparative purposes only.
The pro forma results are not necessarily indicative of what actual results
would have been had the acquisition been completed as of the beginning of the
respective periods, or of future results.
3. Inventories
The components of inventories are as follows at January 1, 2005, and January 3,
2004 (in thousands):
2004 2003
--------- ---------
Raw materials $ 16,723 $ 11,783
Work in process 23,780 16,224
Finished goods 38,577 24,591
--------- ---------
Total net inventory $ 79,080 $ 52,598
========= =========
4. Intangible Assets
The Company recorded amortization expense of $2.4 million, $1.1 million and $0.8
million in 2004, 2003 and 2002, respectively.
The details of intangible assets and future amortization expense of existing
intangible assets at January 1, 2005, are as follows (in thousands):
As of January 1, 2005 As of January 3, 2004
--------------------------- ---------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
----------- ------------ ---------- ------------
Patents and licenses $ 26,318 $ 23,409 $ 22,820 $ 22,803
Distribution network 18,949 10,199 13,440 9,327
Trademarks and tradenames 11,688 4,295 11,145 3,332
----------- ------------ ---------- ------------
Total $ 56,955 $ 37,903 $ 47,405 $ 35,462
Estimated amortization expense related to intangible assets with definite lives
at January 1, 2005, is as follows (in thousands):
2005 $ 3,169
2006 3,169
2007 2,661
2008 2,315
2009 2,215
Thereafter 5,523
--------
$ 19,052
========
The amounts for goodwill and changes in the carrying value by operating segment
are as follows at January 1, 2005, and January 3, 2004 (in thousands):
Additions and
2004 other adjustments 2003
--------- ----------------- ---------
Americas $ 35,458 $ (1,034) $ 36,492
Europe 19,343 7,640 11,703
Asia 448 -- 448
--------- --------- ---------
Total goodwill $ 55,249 $ 6,606 $ 48,643
--------- --------- ---------
5. Investments
Included in investments are shares of Polytronics Technology Corporation Ltd.
("Polytronics"), a Taiwanese company, which was acquired as part of the Heinrich
acquisition. The fair value of this investment at January 1, 2005 is $4.3
million. Included in Other comprehensive income (loss) is a loss of $1.1 million
related to a decrease in the fair market value of Polytronics.
6. Long-term Obligations
The carrying amounts of long-term debt, which approximate fair value, are as
follows at January 1, 2005, and January 3, 2004 (in thousands):
2004 2003
--------- ---------
6.16% Senior Notes, maturing 2005 $ 10,000 $ 20,000
Revolving credit facility 17,500 --
Other obligations 6,822 8,697
--------- ---------
34,322 28,697
Less: Current maturities 32,958 18,496
--------- ---------
$ 1,364 $ 10,201
========= =========
The Company has unsecured domestic financing arrangements consisting of Senior
Notes with insurance companies and a credit agreement with banks that provides a
$50.0 million revolving credit facility. The Senior Notes require minimum annual
principal payments. The revolving line of credit balance becomes due within the
next year. At January 1, 2005, the Company had available $32.5 million of
borrowing capability under the revolving credit facility at an interest rate of
LIBOR plus .875%. The Company intends to renew this line of credit upon
maturity. The Company also had $1.8 million and $1.9 million in letters of
credit outstanding at January 1, 2005, and January 3, 2004, respectively.
The Company also has an unsecured bank line of credit in Japan that provides a
Yen 0.9 billion, an equivalent of $9.0 million, revolving credit facility at an
interest rate of TIBOR plus .875% (.9625% as of January 1, 2005). The revolving
line of credit balance becomes due within the next year. At January 1, 2005, the
Company had an equivalent of $5.4 million outstanding on the Yen facility. The
Company intends to renew this line of credit upon maturity.
The Senior Notes and bank credit agreement contain covenants that, among other
matters, impose limitations on the incurrence of additional indebtedness, future
mergers, sales of assets, payment of dividends, and changes in control, as
defined. In addition, the Company is required to satisfy certain financial
covenants and tests relating to, among other matters, interest coverage, working
capital, leverage and net worth. At January 1, 2005, and for the year then
ended, the Company was in compliance with these covenants.
Aggregate maturities of long-term obligations at January 1, 2005, are as follows
(in thousands):
2005 $ 32,958
2006 88
2007 44
2008 --
2009 --
2010 and thereafter 1,232
---------
$ 34,322
=========
Interest paid on long-term debt approximated $1.7 million in 2004, $2.1 million
in 2003 and $2.5 million in 2002.
7. Other Long-term Liabilities
Included in other long-term liabilities is an accrued liability of $5.8 million
related to a former coal mining operation at Heinrich. The accrual is based upon
the present value of the cost of future occurrences related to the coal mine
shafts (such as a shaft collapse) and the probability of such occurrences.
Actual amounts incurred could differ from the amount accrued. Ongoing
maintenance of coal mine shaft entrances are expensed as incurred.
8. Derivatives and Hedging
On June 11, 2002, the Company entered into cross-currency rate swaps, with a
notional amount of $11.6 million, as a cash flow hedge of the variability of Yen
cash flows attributable to the USD/JPY exchange rate risk on forecasted
intercompany sales of inventory to a Japanese subsidiary. The cross-currency
rate swaps convert $11.6 million of the Company's fixed rate 6.16% U.S. Dollar
debt to fixed rate 3.13% Japanese Yen debt. At the inception of the hedge, both
the foreign currency swap and the intercompany sales subject to the hedge were
denominated in Japanese Yen. The swap agreements were accounted for as a cash
flow hedge and reported at fair value. The notional amount outstanding at
January 1, 2005, was $2.9 million and the fair value of the outstanding
cross-currency rate swap agreements was recognized as a $0.6 million liability
in the accrued liabilities on the consolidated balance sheet. The change in the
liability has been reflected as a charge to accumulated other comprehensive loss
in the consolidated balance sheet at January 1, 2005. The Company's hedges are
considered effective and the net gain or loss from hedge ineffectiveness was not
material.
For the period from June 1, 2004, to September 30, 2005, Heinrich Industrie AG
purchased Euro forward contracts that hedge the variability of U.S. Dollar cash
attributable to the exchange rate risk on forecasted intercompany sales to U.S.
and Asian subsidiaries. These forward contracts guarantee the rate at which the
U.S. Dollar cash flows will be converted to Euro in the future. The forward
agreements are reported at the fair value amounting to $0.2 million which was
recorded as an asset under Other Assets on the consolidated balance sheet at
January 1, 2005. The gains since the date of the Heinrich acquisition were
recognized in the income statement and were immaterial.
9. Benefit Plans
The Company has a defined-benefit pension plan covering substantially all of its
North American employees. The amount of the retirement benefit is based on years
of service and final average pay. The plan also provides post-retirement medical
benefits to retirees and their spouses if the retiree has reached age 62 and has
provided at least ten years of service prior to retirement. Such benefits
generally cease once the retiree attains age 65. The Company also has defined
benefit pension plans covering employees in the U.K., Ireland, Germany, Japan
and the Netherlands. The amount of these retirement benefits is based on years
of service and final average pay. Liabilities resulting from the plan that
covers employees in the Netherlands are settled annually through the purchase of
insurance contracts. Separate from the foreign pension data presented below, net
periodic expense for the plan covering Netherlands employees was $0.2 million,
$0.3 million and $0.3 million in 2004, 2003 and 2002, respectively.
The Company's contributions are made in amounts sufficient to satisfy legal
requirements and ensure funding to at least 90% of the ERISA Current Liability
amount. In 2005, the Company expects to make contributions to defined benefit
pension plans in the range of $1.0 million to $3.0 million.
Changes in actual return on pension plan assets are deferred and recognized over
a period of three years. The deferral of actual gains and losses affects the
calculated value of plan assets and therefore future pension expense.
Differences between total pension expense of $4.3 million, $3.6 million and $1.9
million in 2004, 2003 and 2002, respectively, were not material to the overall
financial performance of the Company. The increases in pension expense in 2004
and 2003 were primarily due to lower asset investment returns than assumed and a
decrease in the discount rate.
U.S. Foreign
2004 2003 2004 2003
----------- ---------- ---------- ---------
Change in benefit obligation
Benefit obligation at beginning of year $ 55,648 $ 54,485 $ 27,479 $ 21,516
Service cost 2,759 2,667 1,066 786
Interest cost 3,498 3,551 1,877 1,260
Plan participants' contributions -- -- 178 178
Acquisition opening balance as of 5/06/04 -- -- 11,771 --
Net actuarial loss (gain) 1,430 (2,152) 654 (22)
Benefits paid (3,110) (2,903) (1,196) (708)
Effect of exchange rate movements -- -- 3,782 4,469
----------- ---------- ---------- ---------
Benefit obligation at end of year $ 60,225 $ 55,648 $ 45,611 $ 27,479
=========== ========== ========== =========
Change in plan assets at fair value
Fair value of plan assets at beginning of year $ 44,667 $ 35,685 $ 22,997 $ 17,347
Actual return on plan assets 5,238 8,886 1,601 1,993
Employer contributions 1,000 3,000 580 537
Plan participant contributions -- -- 178 178
Benefits paid (3,110) (2,903) (676) (708)
Effect of exchange rate movements -- -- 1,906 3,650
----------- ---------- ---------- ---------
Fair value of plan assets at end of year $ 47,795 $ 44,668 $ 26,586 $ 22,997
=========== ========== ========== =========
Unfunded status $ (12,430) $ (10,980) $ (19,025) $ (4,482)
Unrecognized prior service cost (benefit) 114 124 (138) (142)
Unrecognized transition asset -- -- (1,576) (1,555)
Unrecognized net actuarial gain 6,236 6,552 7,173 6,294
----------- ---------- ---------- ---------
Prepaid pension asset (obligation) $ (6,080) $ (4,304) $ (13,566) $ 115
=========== ========== ========== =========
Amounts recognized in the Consolidated
Balance Sheet consist of:
Prepaid benefit cost $ -- $ -- $ 67 $ 50
Accrued benefit liability (6,080) (4,304) (14,337) (208)
Accumulated other comprehensive income -- -- 704 273
----------- ---------- ---------- ---------
Net amount recognized $ (6,080) $ (4,304) $ (13,566) $ 115
=========== ========== ========== =========
The accumulated benefit obligation for the U.S. defined benefits plans was
$51,102 and $45,984 at January 1, 2005, and January 3, 2004, respectively. The
accumulated benefit obligation for the foreign plans was $40,573 and $22,787 at
January 1, 2005, and January 3, 2004, respectively.
U.S. Foreign
2004 2003 2002 2004 2003 2002
------- ---------- -------- ---------- -------- --------
Components of net periodic benefit cost
Service cost $ 2,759 $ 2,667 $ 2,198 $ 1,269 $ 995 $ 796
Interest cost 3,498 3,551 3,528 1,877 1,260 992
Expected return on plan assets (3,649) (3,664) (4,112) (1,521) (1,243) (1,277)
Amortization of prior service cost 10 10 46 (13) (11) (11)
Amortization of transition asset -- -- -- (90) (102) (85)
Amortization of losses 158 110 -- -- -- --
Recognized actuarial loss -- -- -- 206 253 --
======= ========== ======== ========== ======== ========
Total cost of the plan for the year 2,776 2,674 1,660 1,728 1,152 415
Expected plan participants' contribution -- -- -- (203) (208) (175)
------- ---------- -------- ---------- -------- --------
Net periodic benefit cost $ 2,776 $ 2,674 $ 1,660 $ 1,525 $ 944 $ 240
======= ========== ======== ========== ======== ========
Weighted average assumptions used to determine benefit obligations at year-end
2004, 2003 and 2002:
U.S. Foreign
2004 2003 2002 2004 2003 2002
-------- ---------- -------- ---------- -------- --------
Discount rate 6.0% 6.5% 6.8% 4.8% 5.5% 5.5%
Compensation increase rate 4.5% 4.5% 4.5% 3.4% 4.0% 4.0%
Measurement dates 12/31/04 12/31/03 12/31/02 12/31/04 12/31/03 12/31/02
Weighted average assumptions used to determine net periodic benefit cost for the
years 2004, 2003 and 2002:
U.S. Foreign
2004 2003 2002 2004 2003 2002
------- ---------- -------- ---------- -------- --------
Discount rate 6.5% 6.8% 7.3% 5.5% 5.5% 6.0%
Expected return on plan assets 8.8% 9.0% 9.0% 4.7% 6.7% 6.8%
Compensation increase rate 4.5% 4.5% 4.5% 4.0% 4.0% 4.0%
Measurement dates 1/01/04 1/01/03 1/01/02 1/01/04 1/01/03 1/01/02
Expected benefit payments to be paid to participants for the fiscal year ending
are as follows (in thousands):
U.S. Foreign
------- -------
2005 $ 2,762 $ 1,630
2006 2,813 1,991
2007 2,954 2,326
2008 3,149 1,948
2009 3,285 1,855
2010-2014 $19,565 $14,679
Defined Benefit Plan Assets
Based upon analysis of the target asset allocation and historical returns by
type of investment, the Company has assumed that the expected long-term rate of
return will be 8.8% on domestic plan assets and 4.7% on foreign plan assets.
Assets are invested to maximize long-term return taking into consideration
timing of settlement of the retirement liabilities and liquidity needs for
benefits payments. Actual investment returns over the last three years have been
less than the assumed long-term rate of return and, should this trend continue,
net periodic benefit cost would increase. U.S. defined benefit pension assets
were invested as follows and were not materially different from the target asset
allocation:
U.S. Asset Allocation
2004 2003
---- ----
Equity securities 74% 74%
Debt securities 26% 26%
---- ----
100% 100%
==== ====
Foreign Asset Allocation
2004 2003
---- ----
Equity securities 75% 73%
Debt securities 14% 17%
Property 8% 8%
Cash 3% 2%
---- ----
100% 100%
==== ====
Defined Contribution Plans
The Company also maintains a 401(k) savings plan covering substantially all U.S.
employees. The Company matches 50% of the employee's annual contributions for
the first 4% of the employee's gross wages. Employees vest in the Company
contributions after two years of service. Company matching contributions
amounted to $0.5 million, $0.5 million and $0.6 million in 2004, 2003 and 2002,
respectively. The Company provides additional retirement benefits for certain
key executives through its unfunded defined contribution Supplemental Executive
Retirement Plan. The charge to expense for this plan amounted to $0.7 million,
$0.7 million and $0.4 million in 2004, 2003 and 2002, respectively.
10. Shareholders' Equity
Stock Options: The Company has stock option plans authorizing the granting of
both incentive and nonqualified options and other stock rights of up to
4,425,000 shares of common stock to employees and directors. The stock options
issued prior to 2002 vest over a five-year period and are exercisable over a 10
year period commencing from the date of vesting. The Company changed its policy
in 2002 whereby the stock options vest over a five-year period and are
exercisable over a 10 year period commencing from the date of the grant. This
change was not made to stock options already granted.
A summary of stock option information follows:
2004 2003 2002
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- --------- ----------- ----------- ----------- ----------
Outstanding at beginning of year 2,046,720 $ 23.55 1,976,605 $ 23.73 1,902,905 $ 23.63
Options granted
Option price equals market price 363,750 38.44 361,750 22.18 329,250 23.18
Option price less than market price -- -- 20,000 7.00 4,000 5.00
--------- --------- --------- ----------- --------- ----------
Total options granted 363,750 38.44 381,750 21.38 333,250 22.96
Exercised (706,880) 22.93 (169,015) 17.29 (99,580) 15.43
Forfeited (43,150) 26.72 (142,620) 27.64 (159,970) 26.02
--------- --------- --------- ----------- --------- ----------
Outstanding at end of year 1,660,440 $ 26.97 2,046,720 $ 23.55 1,976,605 $ 23.73
========= ========= ========= =========== ========= ==========
Exercisable at end of year 772,440 1,114,028 1,060,140
Available for future grant 454,030 774,870 1,004,500
Weighted-average value of options granted
during the year $ 19.87 $ 13.71 $ 12.75
Option price equals market price 19.87 13.25 12.69
Option price less than market price -- 23.89 20.97
As of January 1, 2005, the Company had the following outstanding options:
Weighted- Weighted-
Options Average Average Options
Exercise Price Outstanding Exercise Price Remaining Life Exercisable
- -------------- ----------- -------------- -------------- ------------
$3.69 to $ 5.00 27,500 $ 4.43 4.79 27,340
$7.00 to $11.16 33,400 8.36 7.86 17,400
$11.63 to $16.50 43,940 14.98 5.36 40,520
$17.81 to $25.50 749,620 21.84 8.84 388,140
$26.63 to $38.80 805,980 33.94 9.84 299,040
Notes Receivable - Common Stock: In 1995, the Company established the Executive
Loan Program under which certain management employees could then obtain
interest-free loans from the Company to facilitate their exercise of stock
options and payment of the related income tax liabilities. Such loans, limited
to 90% of the exercise price plus related tax liabilities, have a five-year
maturity, subject to acceleration for termination of employment or death of the
employee. Such loans are classified as a reduction of shareholders' equity. The
Company changed its policy in 2002 such that management employees may no longer
obtain such loans.
Accumulated Other Comprehensive Income (Loss): At the end of the year the
components of accumulated other comprehensive income (loss) were as follows (in
thousands):
January 1, January 3,
2005 2004
--------- -----------
Net unrealized loss on derivatives $ (177) $ (1,001)
Minimum pension liability
adjustment, net of tax (704) (246)
Unrealized loss on marketable
securities (1,095) --
Foreign currency translation
adjustment 5,649 (1,795)
--------- -----------
Total $ 3,673 $ (3,042)
========= ===========
Preferred Stock: The Board of Directors may authorize the issuance from time to
time of preferred stock in one or more series with such designations,
preferences, qualifications, limitations, restrictions, and optional or other
special rights as the Board may fix by resolution. In connection with the Rights
Plan, the Board of Directors has reserved, but not issued, 200,000 shares of
preferred stock.
Rights Plan: In December 1995, the Company adopted a shareholder rights plan
providing for a dividend distribution of one preferred share purchase right for
each share of common stock outstanding on and after December 15, 1995. The
rights can be exercised only if an individual or group acquires or announces a
tender offer for 15% or more of the Company's common stock. If the rights first
become exercisable as a result of an announced tender offer, each right would
entitle the holder to buy 1/200th of a share of a new series of preferred stock
at an exercise price of $67.50. Once an individual or group acquires 15% or more
of the Company's common stock, each right held by such individual or group
becomes void and the remaining rights will then entitle the holder to purchase a
number of common shares having a market value of twice the exercise price of the
right. If the attempted takeover succeeds, each right will then entitle the
holder to purchase a number of the acquiring Company's common shares having a
market value of twice the exercise price of the right. After an individual or
group acquires 15% of the Company's common stock and before they acquire 50%,
the Company's Board of Directors may exchange the rights in whole or in part, at
an exchange ratio of one share of common stock or 1/100th of a share of a new
series of preferred stock per right. Before an individual or group acquires 15%
of the Company's common stock, or a majority of the Company's Board of Directors
are removed by written consent, whichever occurs first, the rights are
redeemable for $0.01 per right at the option of the Company's Board of
Directors. The Company's Board of Directors is authorized to reduce the 15%
threshold to no less than 10%. Each right will expire on December 15, 2005,
unless earlier redeemed by the Company or if the rights plan is extended or
renewed by the Board of Directors of the Company.
11. Income Taxes
Federal, state, and foreign income tax expense (benefit) consists of the
following (in thousands):
2004 2003 2002
------- ------- -------
Current:
Federal $ 6,656 $10,346 $ (527)
State 1,196 339 249
Foreign 6,880 4,402 5,110
------- ------- -------
Subtotal 14,732 15,087 4,832
Deferred:
Federal and State 3,087 (6,897) 2,987
Foreign 1,411 439 (2,408)
======= ======= =======
Subtotal 4,498 (6,458) 579
------- ------- -------
Provision for income taxes $19,230 $ 8,629 $ 5,411
======= ======= =======
Domestic and foreign income before income taxes is as follows (in
thousands):
2004 2003 2002
-------- ------- -------
Domestic $ 28,115 $ 6,808 $ 6,542
Foreign and Minority Interest 27,296 17,160 8,489
-------- ------- -------
Income before income taxes $ 55,411 $23,968 $15,031
======== ======= =======
A reconciliation between income taxes computed on income before income taxes at
the federal statutory rate and the provision for income taxes is provided below
(in thousands):
2004 2003 2002
-------- --------- --------
Tax expense at statutory
rate of 35% $ 19,394 $ 8,389 $ 5,259
State and local taxes (benefit),
net of federal tax benefit 777 220 162
Foreign income tax
rate differential (1,846) (611) 179
Foreign losses for which no
tax benefit is available 759 -- 34
Valuation allowance 753 -- --
Other, net (607) 631 (223)
-------- --------- --------
Provision for income taxes $ 19,230 $ 8,629 $ 5,411
======== ========= ========
Deferred income taxes are provided for the tax effects of temporary differences
between the financial reporting bases and the tax bases of the Company's assets
and liabilities. Significant components of the Company's deferred tax assets and
liabilities at January 1, 2005, and January 3, 2004, are as follows
(in thousands):
2004 2003
-------- -------
Deferred tax liabilities
Tax depreciation and amortization
in excess of book $ 4,765 $ 1,572
Foreign 2,893 --
Other 511 1,340
-------- -------
Total deferred tax liabilities 8,169 2,912
Deferred tax assets
Accrued expenses 14,475 16,224
Foreign tax credit carryforwards 2,994 2,782
AMT credit carryforwards -- 1,002
Foreign net operating loss carryforwards 5,706 2,666
-------- -------
Gross deferred tax assets 23,175 22,674
Less: Valuation allowance (6,523) (2,666)
======== =======
Total deferred tax assets 16,652 20,008
-------- -------
Net deferred tax assets $ 8,483 $17,096
======== =======
The deferred tax asset valuation allowance is related to deferred tax assets
from foreign net operating losses and a capital loss expected from a
non-controlled foreign investment. The net operating loss carryforwards expire
between 2005 and 2011. The foreign tax credit carryforwards expire in 2013. A
deferred tax asset relating to a net operating loss from an acquired group of
companies has not been recorded since the amount cannot be reasonably estimated
between a range of zero and $15.0 million. The Company paid income taxes of
approximately $11.2 million, $2.7 million and $5.8 million in 2004, 2003 and
2002, respectively. U.S. income taxes were not provided for on a cumulative
total of approximately $43.3 million of undistributed earnings for certain
non-U.S. subsidiaries as of January 1, 2005, and accordingly, no deferred tax
liability has been established relative to these earnings. The determination of
the deferred tax liability associated with the distribution of these earnings is
not practicable.
12. Business Segment Information
The Company designs, manufactures and sells circuit protection devices
throughout the world. The Company has three reportable geographic segments: the
Americas, Europe and Asia-Pacific. The circuit protection market in these
geographical segments is categorized into three major product areas: electronic,
automotive and electrical. The Company evaluates the performance of each
geographic segment based on its net income or loss. The Company also accounts
for intersegment sales as if the sales were to third parties.
The Company's reportable segments are the business units where the revenue is
earned and expenses are incurred. The Company has subsidiaries in the Americas,
Europe and Asia-Pacific where each region is measured based on its sales and
operating income or loss.
Information concerning the operations in these geographic segments for the
fiscal years ended 2004, 2003 and 2002 are as follows (in thousands):
Asia- Combined Consolidated
Americas Europe Pacific Total Corporate Eliminations Total
---------- ---------- --------- ---------- --------- ------------ ------------
Revenues 2004 $ 234,835 $ 129,137 $ 136,270 $ 500,242 $ -- $ -- $ 500,242
2003 167,417 61,098 110,895 339,410 -- -- 339,410
2002 148,047 51,233 83,987 283,267 -- -- 283,267
Intersegment revenues 2004 137,611 58,376 28,718 224,705 -- (224,705) --
2003 70,882 54,742 21,443 147,067 -- (147,067) --
2002 62,022 47,213 17,696 126,931 -- (126,931) --
Interest expense, net 2004 1,668 (175) (2) 1,491 -- -- 1,491
2003 2,068 (25) 2 2,045 -- -- 2,045
2002 2,450 19 184 2,653 -- -- 2,653
Depreciation and 2004 14,308 8,239 1,312 23,859 2,441 -- 26,300
amortization 2003 16,442 1,541 2,350 20,333 768 -- 21,101
2002 13,256 2,853 2,028 18,137 767 -- 18,904
Other expense 2004 (2,106) 1,466 729 89 -- -- 89
(income), net 2003 (728) 91 705 68 -- -- 68
2002 (1,385) (888) 520 (1,753) -- -- (1,753)
Income tax 2004 11,589 3,092 4,549 19,230 -- -- 19,230
expense 2003 4,326 1,022 3,281 8,629 -- -- 8,629
2002 3,583 1,764 64 5,411 -- -- 5,411
Net income (loss) 2004 23,598 (772) 15,643 38,469 (2,441) -- 36,028
2003 5,306 869 9,932 16,107 (768) -- 15,339
2002 2,626 3,235 8,270 14,131 (4,511) -- 9,620
Identifiable assets* 2004 344,277 264,523 64,828 673,628 -- (248,319) 425,309
2003 356,871 33,637 47,798 438,306 -- (126,736) 311,570
2002 286,348 32,908 45,079 364,335 -- (86,857) 277,478
Capital expenditures, net 2004 15,766 2,908 3,405 22,079 -- -- 22,079
2003 12,157 1,954 (70) 14,041 -- -- 14,041
2002 9,256 (2,516) 1,620 8,360 -- -- 8,360
*Corporate assets have been reclassified to Americas for prior periods.
Reconciling items primarily consist of intercompany balances.
The Company's revenues by product areas for the years ended January 1, 2005,
January 3, 2004 and December 28, 2002, are as follows (in thousands):
Revenues 2004 2003 2002
- -------- ---------- --------- ----------
Electronic $ 325,627 $ 206,523 $ 150,838
Automotive 114,736 98,327 98,235
Electrical 59,879 34,560 34,194
---------- --------- ----------
Consolidated total $ 500,242 $ 339,410 $ 283,267
========== ========= ==========
No single customer accounted for more than 10% of revenue.
13. Lease Commitments
The Company leases certain office and warehouse space under non-cancelable
operating leases, as well as certain machinery and equipment. Rental expense
under these leases was approximately $4.5 million in 2004, $3.4 million in 2003
and $2.6 million in 2002. Future minimum payments for all non-cancelable
operating leases with initial terms of one year or more at January 1, 2005, are
as follows (in thousands):
2005 $ 4,371
2006 2,221
2007 1,560
2008 1,084
2009 764
2010 and thereafter 684
--------
Total lease commitments $ 10,684
========
The Company did not have any capital leases as of January 1, 2005.
14. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
(In thousands, except
per share amounts) 2004 2003 2002
- ------------------------------ -------- -------- --------
Numerator:
Net income $ 36,028 $ 15,339 $ 9,620
======== ======== ========
Denominator:
Denominator for basic
earnings per share-
Weighted-average shares 22,239 21,881 21,858
Effect of dilutive securities:
Employee stock options 365 123 113
-------- -------- --------
Denominator for diluted
earnings per share-
Adjusted weighted-
average shares and
assumed conversions 22,604 22,004 21,971
Basic earnings per share $ 1.62 $ 0.70 $ 0.44
-------- -------- --------
Diluted earnings per share $ 1.59 $ 0.70 $ 0.44
======== ======== ========
Options to purchase 362,500, 1,376,122 and 1,434,718 shares of common stock were
outstanding at January 1, 2005, January 3, 2004, and December 28, 2002,
respectively, but were not included in the computation of diluted earnings per
share because the effect of including such options would have been
anti-dilutive.
Selected Financial Data
(in thousands, except per share data)
Five Year Summary
2004* 2003** 2002 2001 2000
-------- -------- -------- -------- --------
Net sales $500,242 $339,410 $283,267 $272,149 $371,920
Gross profit 178,954 104,426 88,623 85,592 150,648
Operating income 56,991 26,081 15,931 8,540 61,748
Net income 36,028 15,339 9,620 4,070 37,298
Net income per share - Diluted 1.59 0.70 0.44 0.19 1.69
Net working capital 98,470 62,120 59,181 62,486 74,503
Total assets 425,309 311,570 277,478 272,272 274,378
Long-term debt 1,364 10,201 20,252 30,402 41,397
* Results include Heinrich. Refer to the Notes to Consolidated Financial
Statements for more information.
** Results include Teccor. Refer to the Notes to Consolidated Financial
Statements for more information.
Quarterly Results of Operations (unaudited)
2004 2003
4Q* 3Q* 2Q* 1Q 4Q** 3Q** 2Q 1Q
-------- -------- -------- -------- -------- ------- ------- -------
Net sales $124,139 $135,926 $128,759 $111,418 $101,963 $94,696 $72,789 $69,962
Gross profit 43,700 49,961 45,488 39,805 29,688 27,786 23,894 23,078
Operating income (loss) 6,892 18,376 15,981 15,742 7,459 7,069 6,322 5,231
Net income (loss) 4,828 11,250 10,344 9,606 4,191 4,073 3,852 3,223
Net income (loss) per share:
Basic 0.21 0.50 0.47 0.44 0.19 0.19 0.18 0.15
Diluted 0.21 0.49 0.46 0.43 0.19 0.19 0.18 0.15
Sales and margins were down in the fourth quarter of 2004 partly due to slower
North American distributor sales. In the fourth quarter of 2004 the Company also
recorded a non tax-deductible charge of $2.2 million to impair a portion of the
Semitron investment acquired in 2002. Operating margins were also unfavorably
impacted by higher operating expenses related to the Sarbanes-Oxley Act
compliance as well as increased consulting, marketing and legal costs.
* Results include Heinrich. Refer to the Notes to Consolidated Financial
Statements for more information. Heinrich gross profit has been reduced by $600
and $1,309 in Q3 2004 and Q2 2004, respectively, to reflect reclassifications
between cost of sales and selling, general and administrative expenses to
conform to 4Q 2004 presentation.
** Results include Teccor. Refer to the Notes to Consolidated Financial
Statements for more information.
Quarterly Stock Prices
2004 2003
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
----- ----- ----- ----- ----- ----- ----- -----
High 40.19 41.48 44.05 37.81 30.12 27.19 23.06 19.02
Low 31.45 32.60 36.24 28.56 23.00 21.79 17.47 16.86
Close 34.16 35.49 42.13 37.20 28.69 22.33 21.66 17.82